Juniper Networks -- SSB Factsheet
(JNPR)#
2S (Outperform, Speculative)
Mkt Cap: $7,754.8 mil.
October 17, 2001 COMPANY DESCRIPTION
Juniper Networks is a cutting-edge supplier of
TELECOMMUNICATIONS next-generation routers. Its M series product line
EQUIPMENT supported by the JUNOS software has helped the company
B. Alexander Henderson capture the number two market share in the core
Internet router market.
FUNDAMENTALS
EPS (12/00A) $0.53
EPS (12/01E) $0.53
EPS (12/02E) $0.48
P/E (12/01E) 43.3x
P/E (12/02E) 47.8x
TEV/EBITDA (12/01E) 16.7x
TEV/EBITDA (12/02E) 16.7x
Book Value/Share (12/01E) $2.44
Price/Book Value 9.4x
Dividend/Yield (12/01E) NA/NA
Revenue (12/01E) $939.7 mil.
Proj. Long-Term EPS Growth 35%
ROE (12/01E) 4.2%
Long-Term Debt to Capital(a) 58.3%
Convertible No
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (10/16/01) $22.95 Rating 2S
52-Week Range $243.00-$9.29 Target Price $26.00
Shares Outstanding(a) 337.9 mil.
First Call Consensus EPS: 12/01E $0.53; 12/02E $0.46; 12/03E $0.58
INVESTMENT THESIS
We believe Juniper Networks has top of the line offerings for the core and
edge of the network. Despite the recent appreciation in JNPR shares off the
bottom, the performance in the quarter and the commentary from management
lead us to believe Juniper may have bottomed operationally and there is more
upside to the earnings estimates than downside risk.
RECENT RESULTS
Juniper Cruises Through Revenue Expectations. In 3Q, Juniper posted revenues
of $202 million, representing flat Q-Q growth. The company shipped 1,026
units, up 14% from the 902 units shipped last quarter. The company shipped
12,736 ports, up 15% Q-Q and clear evidence of positive trends in their edge
router products. On a geographical front, roughly 34% of revenues were
generated internationally, up from 28% last quarter. In terms of customer
contribution, Juniper had two 10% customers, Qwest and WorldCom. Ericsson,
one of their key marketing partners, also contributed over 10% of revenues.
Book-to-bill was greater than one.
Margins Improved As Further Bolstering Results. Gross margins came in at
60.4%, up 20 basis points sequentially and exceeding our forecast by 30 basis
points. Management attributed the solid performance to stable pricing and
the settlement of their obligations to their contract manufacturers.
Operating margins came in at 20.4%, up from 16.9% in 2Q and beat our forecast
by over 460 basis points despite inflated G&A expenses due to a $2 million
provision for bad debt. EPS came in at $0.10, beating forecasts by $0.03.
Management Claims No Impact To Their Business In September. The most
controversial comment from management was that there was no impact to their
business related to the tragic events of September 11th. We believe market
valuations and consensus expectations fully discounted an assumption that
little business was consummated in September. If this assumption proves
untrue, then there is a concern that estimates for carrier-related data
communications companies might have been cut too much. We balance this line
of commentary with the acknowledgement that Juniper did see strong
performance in their international business, logging a number of new customer
wins from these markets. By our calculations, Juniper's domestic business
was down 9% Q-Q but international was up 21% Q-Q, in a period where
international sales tend to be weak due to seasonality.
According To Management, Carrier Capex Cuts A Greater Problem For Optical
Vendors --We Agree. Management addressed the issue of whether the network
core is dead for the next few years. Management's argument is that while
there might be meaningful excesses at the optical level, investments at the
IP level have been more incremental and so there is less of an overhang.
Specifically, management noted that while some ports on routers are running
at less than capacity, they do not believe there are idle core routers being
inventoried by service providers. Consequently, while acknowledging that
data networking is not immune to the secular trend toward lower capex, they
argued most of the impact is likely to remain with the optical vendors.
Expanded Customer Base. We attribute a good portion of Juniper's success in
the quarter to their ability to continue to garner contract wins. At the end
of the quarter, management noted that they believed they had over 500
customers in 45 countries.
Strong Balance Sheet. Juniper's balance sheet points to the quality of their
3Q operating results. Cash and investments increased by $70 million to
almost $1.1 billion. The company's DSOs fell by 12 days to 50. Management
attributed this strength to the quality of their customer base and a
disciplined approach to cash collection. Deferred revenues also continued
their upward trend of recent quarters, increasing by over $2 million.
VALUATION
Shares of JNPR have rallied sharply since October 5, at aproximately 45x 2002
earnings and 32x 2003 earnings. We think Juniper can grow 35% over the next
3-5 years as data networking traffic continues to expand and as the data
networking sector continues to take share from traditional equipment
categories. Based on this growth rate, we think 2 times growth is
attainable, which implies a target of 70 times earnings in a healthy economic
backdrop. Even if we discount the growth rate back to 25%, this yields a 50
P/E on forward results. By the end of 2002, this yields a target of price of
$33. We believe our target price of $26, which is based on 55X 2002
estimates and 40 times 2003 estimates by the end of 2002 is reasonable and
defensible even if the growth target were as low as 20% annually.
RISKS
Juniper Networks has a number of risks. Our key concern is the timing of the
release of its new flagship product, the successor to the M160.
The timing
is unsure and management refuses to comment on unannounced products. We
believe Cisco's upgraded product offerings are heightening the pressure on
Juniper. Another risk is the decline in capital expenditures by service
problems. Carrier cap ex is expected to decline in the double digits for
2001 and 2002. Juniper derives all of its revenue from service provider
customers. Other risks include Juniper's premium valuation compared to its
competitors and the risks of competing against a large established player
such as Cisco. |
